Consumer & Retail Barometer – December 2016 CPI

CPI inflation rate accelerates further as residential rental inflation accelerates, and remains firmly “anti-poor” with no food price inflation slowdown in the numbers yet.

The December 2016 Consumer Price Index (CPI) year-on-year inflation rate accelerated from a previous month’s 6.6% to 6.8%%, thus rising to 0.8 of a percentage point above the upper limit of the SARB (Reserve Bank) 3-6% inflation target range.

The key contributors to this further acceleration in the year-on-year inflation rate were the Housing and Utilities CPI (from 1.3 of a percentage point contribution previous to 1.4 of a percentage point), Recreation and Culture (an additional 0.1 of a percentage point in December), and the Restaurants and Hotels CPI (also an additional 0.1 of a percentage point).

Against this, some moderation in petrol price inflation in December took the Transport CPI’s contribution to the overall year-on-year rate down slightly (-0.1 of a percentage point). The big ticket Housing and Utilities CPI saw the quarterly survey of residential rental inflation take place, Actual Rental year-on-year inflation accelerating from 4.9% previous to 5.2% in December, and Owner Equivalent Rental inflation accelerating from 4.6% previous to 5%.

However, the CPI for Food and Beverages continues to be the single biggest contributor to the overall CPI inflation rate, to the tune of 1.8 of a percentage point, with its year-on-year inflation rate measuring 11.7% in December, slightly higher than the 11.6% for November.

The SARB (South African Reserve Bank) MPC (Monetary Policy Committee) meets next week, so this inflation acceleration can be “interesting”, given that it remains above the upper inflation target limit of 6%.

However, the FNB view is for unchanged interest rates. FNB says this because the SARB is expected to be looking forward and foreseeing a significant slowing in food price inflation as merely a “matter of time”, given reports of at least partial alleviation in drought conditions to date.

And indeed, the Producer Price inflation rate for Agriculture, normally a leader in the direction of the Food CPI, has slowed sharply already, from 20.6% year-on-year in June 2016 to 6.9% by November 2016, pointing to a looming slowdown in food price inflation. Slowing food price inflation can return the CPI inflation rate to the 3-6% target range in the near term.

In addition, the Rand has behaved reasonably well in recent times, with the trade-weighted exchange rate index having strengthened by 23% year-on-year in January to date. This could significantly curb broad imported consumer price inflation in the near term.

However, until such time as food price inflation does subside, however, the key concern must be the ongoing wide differential between the inflation rates of low income groups versus those of the higher income groups, with low income groups experiencing significantly higher CPI inflation rates.

This is largely the result of food’s far higher weighting in the lower income groups’ expenditure baskets. So, “Expenditure Quintile 1”, the lowest expenditure quintile (a good proxy for lowest income group) had the highest CPI inflation rate of 8.36%, while Expenditure Quintile 5, the highest expenditure group still had the lowest inflation rate of 6.58% as at December.

Read more here: Consumer & Retail Barometer December CPI – 18th Jan 2017